LONDON - Two UK-quoted companies, Vanguard Medica plc and CeNeS Pharmaceuticals plc, have confirmed they are in merger talks. If successful, this deal would create a company with a market capitalization of #173 million at last Friday's closing prices.

Neither company is commenting further, and said it would be several weeks before there is any outcome to the talks.

Apart from the advantages of size, the logic would be in the merging of the two companies' skills in central nervous system (CNS) disorders. Vanguard, based in Guildford, Surrey, was originally set up as a virtual company, licensing in compounds for development. It went public in 1996, raising #45 million. In December 1999, with the portfolio looking very thin following decisions to drop VML 295 and 262, both for the treatment of psoriasis, and VML 252 for the treatment of hyperphosphatemia, Vanguard changed strategy, acquiring the private company Cerebrus plc.

The all-share deal, valuing Cerebrus at #9.6 million, gave Vanguard a 70-member team of researchers with CNS discovery skills. The acquisition also brought with it the cachet of a license with F. Hoffman-La Roche of Basel, Switzerland, for Cerebrus' serotonin receptor program for the treatment of obesity. In addition, Cerebrus had advanced preclinical projects in Parkinson's disease, cerebral malaria and chemotherapy-induced emesis.

Plans call for changing the name of the merged Vanguard/Cerebrus entity to Vernalis Group plc if the shareholders give approval on May 19.

CeNeS, based in Cambridge, has six CNS compounds in development. It went public in June 1999 via a reverse takeover of the drug delivery company Core Group plc. Since then, it has done a string of deals to capitalize on its drug discovery capabilities, most notably with Bioglan Pharma plc, of Hitchin, Hertfordshire. This collaboration involved Bioglan taking a 9 percent stake in CeNeS.

Both Vanguard and CeNes are close to having a product on the market. In October 1999, the FDA deferred approval of Vanguard's migraine treatment frovatriptan, with a request for further toxicity data. Elan Pharmaceut icals, of Dublin, Ireland, has U.S. marketing rights to this drug, which Vanguard licensed from SmithKline Beecham plc, of London.

Approval is pending for CeNeS's moraxen, a controlled-release formulation of morphine developed by Core. It will be marketed by Schwarz Pharma in the UK and by Bioglan in the rest of Europe.

While there is plenty of business logic for the deal, the prickly issue likely is to be who runs the merged company. Both Robert Mansfield, CEO of Vanguard, and Dan Roach, CEO of CeNeS, are high-profile members of the UK biotechnology community.